Do Good Starts Make Good Finishes?The Case of CEO Pay

Helena CímerováAuckland University of Technology

School of Economics and Finance Seminar Series Victoria University of Wellington, 2 May 2014

Motivation

Is the market for CEOs efficient?

Source:www.newyorker.com

Outline

•Under focus: CEO pay efficiency•Key findings •Cohort effects research & explanations for findings•Data + Empirical methodology •Results•Conclusions

Key results

•The market for CEOs is efficient: initial luck not reflected in CEO pay• No evidence of persistent rewards for CEOs for

good first job• No procyclical cohort effects, rather

countercyclical (IV)• A higher first CEO compensation if good first job

(≈30% for top-ten firm), dissipates over time

Cohort effects research•Neumark (2002): early job mkt stability•Oyer (2006): PhD economists•Oyer (2008): MBA investment bankers• Kahn (2010): US male college graduates• Kwon et al. (2010): US & Swedish workers

(recovery phase of business cycle)•Oreopulos et al. (2014): CAN college graduates• Schoar and Zuo (2013): “recession CEOs”

> procyclical cohort effects <

Cohort effects research - explanations

•Productivity-based explanations (human capital disparities)• Initial match quality• procyclical effects• countercyclical effects

•Non-productivity based explanations (downward rigidity in jobs, LT contracts, signaling)

Data

• S&P 1,500 universe – public CEOs• 13,378 obs.; 1,473 companies; 2,184 CEOs• ExecuComp (1992-2007), BoardEx• Compustat + CRSP•NBER, US BLS, Fed

• Full sample + subsamples; CS• Selection issues

Source: Adexchanger.com

Empirical methodology

First placement success (firm size) → current placement success (CEO compensation)

• Fixed effects estimation• Instrumental variables estimation / Two-stage least squares•Cross-section (first CEO pay)•Robustness checks

Empirical methodology

(IV/2SLS)

Controls:Firm-level• size• inv. opportunity • firm performance• volatility of firm

performanceCEO-level• tenure• duality• external hire• education• gender

CEO compensation

first firm size

macro cond. / fin. mkts

Instruments:• Related to macroeconomic

conditions: recession indicator, U.S. unemployment rate, investment-grade bond yield spread

• Related to financial markets:1-yr volume chng., 1-yr return, 2-yr std. dev. of S&P 500 index

TDC1, TDC2

Mkt. cap, total assets, …

CEO talent pipeline

Results (1)

• FEs (firm fixed effects): <4% / no effects or lack of support in the data?(firm rank 6-12% TDC1, top ten firm 12-14.5% TDC1)

• IV: 30%-50% countercyclical cohort effects(single instrument, reduced-form regressions)

•Cross-section: first CEO pay up to 30% higher if top-ten firm

Results (2)

•Robustness:• IV with employment growth rate: no cohort effects• Cross-section: stable coefficients• Weak-instrument robust estimation with CLR

confidence sets: first firm size elasticity relat. to current CEO compensation <-1%

Conclusions / Contributions

• another test of CEO market efficiency• existence and persistence of cohort effects seems to depend on the segment of labor market

•efficient market for CEOs: initial luck not reflected in CEO pay

Thank you.